Shares in London-listed water companies soared on Thursday after regulator Ofwat proposed a record £88billion ‘upgrade package’, funded through a jump in customers’ bills.
The funding package was announced as the industry endures an existential crisis, with water firms facing the threat of renationalisation amid billions of pounds of debt, crumbling infrastructure, and a litany of environmental and regulatory failings.
The crisis has seen Thames Water, which sits on a £15billion mountain of debt, warn it only has enough liquidity to fund its operations for another 11 months, and South East Water go cap in hand to investors for an emergency cash injection.
Plugging the leak: Water firms face pressure to invest in infrastructure while tackling debt too
Severn Trent and United Utilities led the FTSE 100 on Thursday afternoon, adding 4.6 and 4.1 per cent, respectively, while South West Water owner Pennon Group saw its shares rocket 9.7 per cent to the top of the FTSE 250 index.
All three groups welcomed the proposals, but none look set to receive as much funding as they had hoped for in their business plans.
Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said: ‘Like a sports team drafting a new player, the water regulator (Ofwat) has selected how much water companies can hike consumers’ water bills between 2025 and 2030.
‘Ofwat has proposed an average annual increase of £19 a year over the next five years, which is a third less than the roughly £29 per year increases requested by water companies.
‘These bill hikes are needed to pay for infrastructure upgrades, fixes to burst pipes, and deliver cash returns to investors as a reward for funding the company.’
Pennon, which handed boss Susan Davy a £860,000 pay package last year amid a parasite contamination scandal, saw Ofwat recognise South West Water’s business plan as a ‘leading plan’.
Its Sutton and East Surrey Water business, which was bought in January, had its plan assessed as ‘generally good’.
South West Water customers will see their bills go up by £64 on average by 2029-30 to £561. The company wanted to see average annual customer bills rise to £596.04 by 2030.
Pennon shares were also handed a boost by the announcement of new chief financial officer Laura Flowerdew, who was previously finance chief for Bristol Water.
Severn Trent, which paid boss Liv Garfield £3.2million last year despite rising instances of sewage spills, saw its business plan rated as ‘outstanding’
Severn customers will see bills rise by £93 on average to £496 by 2030. The company wanted to them to rise to £518 by 2030.
The group was also handed a boost by a trading update, which reported a ‘strong start’ to the year with the firm on target to meet financial targets or 2024.
United Utilities said Ofwat’s proposals are ‘an important step in the regulatory framework that aims to enable the delivery of critical investment required to improve river health, strengthen our network and deliver better services for customers, communities and for the environment’.
The group’s customer bills will rise by £94-a-year on average by 2030 to £536. United Utilities wanted bills to rise to £556.14.
All three firms will have the chance to respond formally to the proposals by 28 August, with Ofwat set to publish its final decision on 19 December.
Government ministers are holding urgent talks with water bosses on Thursday to discuss the industry’s future.
Executives from Thames Water, South East Water and Severn Trent are among those who have been summoned to meet Environment Secretary Steve Reed.
Mark Crouch, analyst at eToro, said: ‘A distinct lack of investment in the country’s water infrastructure has almost become a throwaway line in recent years, with water companies accused of prioritising profits over safety and quality while running something of a monopoly, given the lack of competition.
‘Calls for the new Labour government to nationalise the water companies are getting louder. And while that prospect seems unlikely, it will hopefully act as a potent incentive for firms to clean up their act.’
Hargreaves Lansdown’s Chiekrie added: ‘The new Labour administration will want to avoid nationalisation but will have to step in given that it’s such a crucial part of the country’s infrastructure.
‘It’s likely that emergency plans are being worked on to establish a special government arm to run the company if the financial pug does end up being pulled out.’
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